When investing, it’s important to keep the big picture in mind. Even after a 10% drop last week, the ASX 200 Total Returns Index is still up 113% over the past 10 years.
However, we know it is difficult when it’s your own money, and seeing the big picture is not always easy as your goals may not be long term.
When stock prices are plunging over a matter of days, it can test anyone’s resolve. But periods of turbulence can be good for long-term investors. For long term investors, sometimes the best advice is: “Buy stocks.”
The market has always bounced back
While the ASX 200 Total Returns Index is down 3% this year, it’s still up almost 9% in the past 12 months, and a solid 35% in the past five years. This is substantial when compared to interest rates.
For old experienced investors, who have lived through many stock market corrections, a 3% decline in one day is just a blip; stock market corrections happen.
Now coronavirus is front and centre. Something else will be front and centre six months from now and a year from now and two years from now. Rather than trying to predict that market’s moves in the short term, investors can be better off by remaining disciplined and sticking to their strategy.
The market is correcting for more reasons than the coronavirus. Another driving factor in this correction is the strong rally we have had in the market over the last 12 months. That is why the market is still up almost 9% over the last 12 months.
The 20- and 30-year outlook for markets is not changed by the coronavirus.
How to take advantage of market dips
Given that the market will eventually bounce back, there is the potential to seize the opportunity and buy more when prices are lower. You can take advantage of these declines in two ways: by dollar-cost averaging and by lump-sum investing.
With dollar-cost averaging, you regularly add money to your portfolio over time. That is, you will invest small amounts of money on a regular basis.
Doing so simplifies the investing process, removes the temptation to try to time the market by predicting when prices will be higher or lower and can help manage risk for long term investors.
With lump-sum investing, you take a more tactical approach, which is also usually driven by emotion. If you see that the market has fallen by a certain amount, you’ll dive in with money you’ve been saving up for this exact purpose.
For example, if you receive a tax refund, a smart way to use that money is to invest it in the market. The goal here is to buy at the lowest possible price.
The same logic applies for withdrawing your money in a lump sum, it is a tactical approach, usually driven by emotion rather than sticking to your investment saving strategy.
Research shows dollar-cost averaging minimises the potential for regret. And it’s rare that most people have the skill to make timing a lump-sum investment attractive. It is all about time in the market, not timing the market.
“Successful investing takes time, discipline and patience.” – Warren Buffett